Day after day, CFOs and investors alike make decisions based on the principles of modern financial theory. Developed in the decades after World War II, these theories began as isolated academic concepts. Today they shape our corporations. The assumptions they make about the behavior of investors has influenced everything from capital budgeting decisions to CEO compensation. The conclusions they draw spawned a whole school of management that focuses on giving shareholders their due. Indeed, these theories have become such an essential part of doing business that one finance textbook urged students to tattoo their prescriptions on their foreheads.
A version of this article appeared in the March–April 1993 issue of Harvard Business Review.